Truck maker Navistar International Corp.
NAV, -3.65%
said Friday it will adopt a pollution-reduction technology for its engines used by the rest of the industry, shifting from an alternative strategy that weakened confidence in the company and caused its stock price to collapse.

Navistar plans to treat diesel-engine exhaust with a process known as selective catalytic reduction, or SCR. The process, which involves filtering exhaust through a urea solution, will be used in tandem with another treatment technology called exhaust-gas recirculation, or EGR. The combination is used by all truck manufacturers in North America except Navistar.

The engines, which the company said won't hit the market until early next year, will require unspecified spending for the transition. This uncertainty weighed on Navistar shares Friday, which were recently down 15.9% at $24.20, taking the stock's 12-month decline to 57% in the past year.

SCR components, which Navistar is expected to purchase from an outside supplier, will be added to exhaust systems on its trucks.

"The engines our customers have been buying will stay the same," Chairman and Chief Executive Daniel Ustian said on a conference call with analysts. "We're going to take the technology we've developed and add after treatment to it."

But the approach carries costs for engineering and integrating SCR into the company's production processes. Moreover, the SCR-equipped engines face approval from federal environmental regulators, an evaluation process that is likely to take months.

"Given (Navistar's) past history of executing on things, people are skeptical," said David Leiker, an analyst for Robert W. Baird & Co. in Milwaukee. He said many investors would have preferred a more expedient approach, such as purchasing SCR-equipped engines from Cummins Inc. (CMI).

The company was recently forced to adopt a poison pill as activist investors including Carl Icahn built large stakes in Navistar, igniting takeover speculation.

Navistar said some of its trucks in Brazil already use SCR, giving the company a head start on integrating the system into its North American engine lineup.

"We're fortunate to have a portfolio of engine technologies and experiences to deliver what believe will be the cleanest engines and the most fuel-efficient engines," said Troy Clarke, president of the company's truck, engine and parts operations.

Navistar, which manufactures heavy- and medium-duty commercial trucks, school buses and military vehicles, has been trying to meet the U.S. Environmental Protection Agency's 2010 emissions standard by using EGR alone. Navistar bet that it could use a cost-advantage on EGR engines to capture market share from its competitors that had opted for the more-expensive SCR system.

But Navistar's inability to obtain EPA certification for its engines since then has eroded customer confidence, causing sales of Navistar trucks to drop in recent months.

Mr. Ustian and other company executives had been adamant that the company wouldn't need to use SCR to reach EPA's mandate for an ultra-low level of smog-causing nitrogen oxide in diesel exhaust. Analysts said Friday's announcement represents the company's acknowledgement that its EGR-only strategy has been a failure.

"They basically threw in the towel on the EGR engine," said Walt Liptak, an analyst for Barrington Research in Chicago. "If they'd done this in the first place, they'd be right where the rest of the industry is."

Navistar's addition of SCR, which was reported earlier this week in The Wall Street Journal, is expected to bring the company's engines into regulatory compliance and alleviate a two-year-old logjam between Navistar, the EPA and the California Air Resources Board, which regulates air pollution in California and about 10 other states.

"Both agencies are encouraged by our plans," Mr. Ustian said. "We will continue to work with the agencies to ensure that our customers receive uninterrupted deliveries in all 50 states during this transition."

In the meantime, Navistar said, the company will continue to sell noncompliant engines and use previously acquired pollution credits and fines to cover its engines' lack of compliance. But it will likely have to resort to steep discounts to induce truckers to buy the company's trucks, sacrificing Navistar's profit margins. Navistar has reported two straight quarterly losses stemming from lower truck sales and warranty claims on its new engines.

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